Like many contentious issues, ethanol use has its backers and detractors. Now that much of the U.S. corn crop has withered, calls to reduce the amount of the U.S. corn going for biofuel production have increased, and the federally mandated Renewable Fuels Standard, which requires 32 billion gallons of biofuel to be mixed into gasoline by the end of next year, is under attack.
Like many contentious issues, ethanol use has its backers and detractors.
Whether or not the mandate is waived will affect food inflation, because corn is more economically important as a food commodity than as an energy one. By how much food prices are affected by converting corn into fuel is a matter of debate, but with drought-related yields expected to be about 14 percent lower this year, it is difficult to imagine a lower supply isn't going to have some kind of effect on food prices. At the same time, the ethanol industry has expanded, thanks largely to subsidies that ended last year, and an entire energy industry has been built around it. That means it has economic clout and political backers just like any other large industry.
What started out as an effort to reduce emissions and dependence on foreign oil has become a multibillion-dollar industry employing more than 90,000 people directly, according to the Renewable Fuels Association. Between 1999 and 2011, ethanol production has grown eight-fold, to 13.9 billion gallons last year. In the same time period, the number of plants has grown from 50 to 209.
Environmentalists have since eschewed ethanol, seeking better fuel-efficiency standards and hybrid technologies over ethanol. Food security advocates say food calories shouldn't be converted into fuel calories. And economists point to how corn plays an important role in general food inflation.
Defenders insist ethanol lowers fuel prices, saying its effect on food prices is exaggerated, because a considerable amount of corn is returned to the livestock feed market after distillation, and, according to least one flier by a pro-ethanol group in Iowa, it helps cut "funding to terrorists."
No matter what, one thing is certain: Less corn means higher prices for products linked to corn -- that is to say, almost everything an American eats that isn't a basic staple or plant.
Bruce Babcock, economics professor at the University of Iowa, estimates that waiving the federal Renewable Fuels Standard that requires generally about a third of the U.S. corn crop to be converted into ethanol would reduce the price of corn in the short term by 4.6 percent, lowering the cost of livestock feed and the "downstream" food products, especially meat, poultry and dairy.
Here are four main narratives bouncing around this debate:
Ethanol use lowers the price of gasoline. "The results indicate that over the period of January 2000 to December 2011, the growth in ethanol production reduced wholesale gasoline prices by $0.29 per gallon on average across all regions," said Xiaodong Du and Dermot J. Hayes of the Center for Agricultural and Rural Development at Iowa State University in a report earlier this year.
Ethanol use raises consumers' fuel costs. "Increased ethanol production from January 2000 through February 2012 had no statistically significant effect on gasoline prices or oil refiner margins," said Thomas Elam, president of FarmEcon LLC, in a study published last month dismissing claims ethanol has ever lowered gas prices. "The lower energy content of ethanol has actually increased the cost of U.S. automobile motor fuel."
Less ethanol means lower corn prices. "The 2.4 billion-gallon amount of flexibility assumed in this study lowers the corn price impact of the ethanol mandate in this drought year from $1.19 per bushel to $0.28 per bushel," said Bruce Babcock, economics professor at the University of Iowa, in a study published last month regarding the U.S. drought's effect on biofuels and corn. "This means that relaxing the mandate further would have modest impacts on corn prices. Of course, this result is conditional on the distribution of corn yields used in this study. If corn yields turn out to be much lower than assumed here, then the impact of the mandate would be far greater."
More ethanol harms consumers of corn flour (hint: Mexico). "Countries like Mexico, where nearly every family relies on corn for food, are bracing themselves for rising tortilla prices. Considering the United States is the biggest exporter of corn, it is grossly irresponsible for our government to mandate that 40 percent of U.S. corn crop to go to fuel instead of food or feed even in times of a natural disaster." said Marie Brill, senior policy analyst at ActionAid USA in Washington, in the Chicago Tribune on Monday. Mexico is one of the few countries in the world whose poorest depend largely on corn meal used to make the nixtamal dough for tortillas, and it imports an important quantity of the grain from the United States.
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